Coinbase: All You Need to Know About this Crypto Giant

The cryptocurrency space has been on fire in the last 13 months. The price of a single Bitcoin surged to a record high of over $64,000 this week and is now up over 15x in the last year. You can gain exposure to Bitcoin by purchasing ETFs or purchasing the crypto asset over an exchange. You can also gain indirect exposure by purchasing shares of companies that hold Bitcoin on their balance sheets such as Tesla (NASDAQ: TSLA) or MicroStrategy (NASDAQ: MSTR).

Another way is to buy stocks of recent IPO- Coinbase (NASDAQ: COIN) which is the largest cryptocurrency exchange in the world. As of March 31, 2021, Coinbase had over 55 million users, with a quarterly traded volume of $335 billion.

Coinbase stock initially had a reference price of $250 based on the recommendations of investment banks. This pricing gave Coinbase a market cap of $65 billion. However, as demand for its shares rose at a steady pace, the opening price of Coinbase stock rose to $381, valuing the company at a market cap of $100 billion.

Coinbase stock touched an intra-day high of $430 before ending the day at $328.38. While the shares fell 14% compared to its opening price, it also gained over 30% compared to its initial reference price.

The monthly transaction users on the Coinbase platform is 6.1 million while it has over $223 billion of assets on its platform, indicating a market share of 11.3% in the cryptocurrency space. Coinbase confirmed $122 billion of these assets are held by institutional investors.

How does Coinbase generate sales?

Similar to most other exchanges, Coinbase derives a majority of its revenue via trading fees that accounted for 96% of total sales in 2020. The primary source of revenue is transaction fees which range between 0.99% and 2.99% for the retail investor and depends on trading volumes.

Coinbase sales are directly proportional to the volume of trading on its platform. Further, the volume of trading has a direct co-relation to volatility in the crypto space.

When prices of Bitcoin and other cryptocurrencies move higher, trading activity increases as retail investors start buying these digital assets. Alternatively, Coinbase has also experienced massive declines in a bear market. In the first quarter of 2018, total trading volume on the Coinbase platform stood at $56 billion. As Bitcoin prices slumped by over 90% in the next 12-months, the company’s trading volume declined to just $7 billion in Q1 of 2019.

Revenue of $1.8 billion in Q1

In the first quarter of 2021, Coinbase sales surged by a staggering 844% to $1.8 billion compared to $191 million in the prior-year period. The company has forecast net income between $730 million and $800 million. At the midpoint forecast, Coinbase’s net income will surge by a staggering 2,300% year over year.

In 2020, Coinbase sales stood at $1.3 billion while in 2019 it was $533.7 million. Comparatively, its EBITDA rose from $24.3 million in 2019 to $527 million in 2020. In Q1 of 2021, EBITDA is forecast at $1.1 billion. We can see Coinbase has improved its EBITDA margin from 4.6% in 2019 to around 60% in Q1 of 2021 indicating high operating leverage.

The risks associated with Coinbase stock

Similar to other IPO stocks, investors should expect Coinbase to remain volatile in the near term. Coinbase's top-line will be severely impacted when the cryptocurrency markets turn bearish. Bitcoin has in fact lost over 90% of its market value multiple times in the past and a similar decline will result in a steep decline in Coinbase sales. As seen in this report, when crypto prices fell 60% in 2018, Coinbase sales fell 50%.

The high trading fees charged by Coinbase might drive users to other platforms while legacy trading companies might also enter this highly disruptive space.

However, the inflow of institutional funds in the crypto space, a volatile macroeconomy, a weak U.S. dollar, and widespread adoption of digital currencies make Coinbase a solid bet for long-term investors. Investors who are bullish on the crypto space should leverage the company’s parabolic growth as Coinbase continues to increase market share.

Related: Should You Invest In This Bitcoin ETF

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